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The State of Illinois has a very large unfunded pension liability and will likely have to pay much of it off by raising taxes. The Illinois Commission on Government Forecasting and Accountability estimated the state’s unfunded liability at $129.1 billion in mid-2017,[1] which was about 19% of state personal income.[2] Benefits to public employees are protected under the Illinois Constitution, and a recent attempt to reduce the unfunded liability by reducing retirees’ benefits was struck down by the Illinois Supreme Court.[3] So, assuming that the state can’t reduce its current pension obligations and that it wants to maintain its current level of services, Illinois residents are going to have to pay higher taxes. What’s the best way to do it?

From bad questions come bad answers.

The State Constitution can be amended. There are multiple ways to do it, I might add, and what is being proposed here can quite-easily lead to a rather lawless manner of amendment.

In our view, Illinois’s best option is to impose a statewide residential property tax that expires when its unfunded pension liability is paid off. In our baseline scenario, we estimate that the tax rate required to pay off the pension debt over 30 years would be about 1%. This means that homeowners with homes worth $250,000 would pay an additional $2,500 per year in property taxes, those with homes worth $500,000 would pay an additional $5,000, and those with homes worth $1 million would pay an additional $10,000.

Oh really?

The rest of the paper goes on to try to explain how it raises the revenue and why it will work, which devolves down into "property can't get up and walk out of the state."

True enough, but not material.

The Fed is full of people who handle zero-coupon bonds all day long. A zero coupon bond is one that is sold at a discount to its face value representing the future payments that otherwise would be made in coupon. Since the amount of the coupon is known, so is the discount at original issue. It's very easy to figure out the discounted cash price since one knows the amount to be paid and when.

Well?

Let's take their example. A property "owner" with a $250,000 house would pay $2,500 a year. Let's assume this really does retire the debt in 30 years. Well then, that means the zero coupon basis of the property just went down by $75,000 (30 years * $2,500.)

As The Chicago Fed notes the market will instantly reprice the property downward to account for this tax liability. But guess what -- assessments are on value!

So what happens?

Said owner goes to the county assessor and immediately protests his taxes, because his house isn't worth $250,000 -- it's only worth $175,000. He's not going to pay $2,500 a year -- not the first year, and not any year after that either.

So what happens next?

The state comes up short, and what do they do? They raise the tax again.

Guess what? The property owner now gets the new discount figured out almost instantly by the market and he protests again.

Eventually someone picks up either a ballot or a lot of people pick up rifles, having been dispossessed of virtually the entire value of their property.

Oh, and as for businesses? They can leave, and they can do so quickly. Most businesses lease their property and most leases are either "triple net" or similar. There will be plenty of walk-outs over this and lending covenant violations by the owners of said buildings, with the businesses telling the owners of the property to sue them if they'd like but they consider this a force majure event and ain't sticking around to get reamed in this fashion.

Those businesses that do remain will raise prices, which of course will be just fabulous for all those people who just saw 30% of their home equity go up in smoke.

Finally if you think Illinois residents have "benefited" from the past "services" of said employees, well, that old bridge over the Chicago River (pick one) might get dropped into said river if you run that load of crap on too many people.

Leaving aside the political ramifications of this, which might well not remain peaceful, the economics simply don't work. What's worse is that the Chicago Fed knows this because the Chicago Fed, like all banks (Federal Reserve or not) are bond dealers and are well-versed in exactly how instruments that behave like bonds have discounted cash flows either accruing to them or flowing from them impact their valuations.

Good luck Illinois. With this sort of horsecrap flying out of the mealy-mouthed folks who ought to be considered felons you're gonna need it.

Vest says it is a cold hard fact that tolls on the Mid-Bay Bridge will not increase to $7.50 next year. It is likewise written in stone, he said, that there will be no bridge toll hike of any amount before Oct. 1, 2015, the beginning of the 2016 fiscal year.

....

In fact, the Mid-Bay Bridge, built with $81 million in bonds in the early 1990s, these days carries a debt load of $260 million.

That’s why it is possible, Vest concedes, that if the Bridge Authority does find it needs to raise tolls for the third time in its existence, the cost of the trip across could go from $3 to $4 for two-axle vehicles and $2 to $3 for SunPass holders.

Nobody is talking about how the bridge went from $81 million in bonds to $260 million outstanding.

Nor are they talking about the "fact" that the terms of the bonds dictate that tolls must (if necessary) rise.

Even if doing so cuts use, and thus the total revenue falls, producing a death spiral.

The problem with these projects is that they invariably obtain their "go ahead" from the local residents predicated on two promises -- first, that they will be built and operated on time and on budget, and second that the bonds will be retired and once they have been the tolls will be lifted or reduced to that which is necessary only for ongoing maintenance.

The latter never happens and the former almost-never does.

The people responsible for that gross dereliction of duty, resulting in the tripling of the bridge's debt, from the County Commissions on to these "authorities", never, ever face prosecution or even debarment from public office for the outrageous deception they run on local residents in the promises they make and never keep when it comes to these "projects." Never mind that if I screwed someone in the private sector to this degree I would, and the Commissioners and Authority "trustees" should, find themselves on the wrong end of a felony conviction.

But see, political promises carry no weight and are utterly unenforceable even when they screw the taxpayer blind. As a politician you can make claims that you have absolutely no rational backing for or even lie outright and when your "projections" and "expectations" turn out to be crap nothing happens to you for buying votes with what proves up to be a pipe dream or worse.

Instead of being accountable these very same public officials now make excuses and tell us how "wonderful" the cut of 20 minutes will be on our mythical trip that they dream will fill the coffers and pay the coupon on said unsustainable and outrageous debt -- debt that their outrageously unrealistic expectations and projections caused to triple from what was originally proposed and agreed to by the people in the first place.

The "add-on" extension now being constructed is responsible for $143 million of this debt. But there is no evidence -- absolutely zero in fact, even based on the rosiest of projections -- that the bond issues outstanding will be retired on or before the roadway requires resurfacing.

Indeed, had there been any record of the Authority being able to pay down debt predicated on operating revenue the problem, and debt, wouldn't exist -- right?

The inevitable resurfacing and upkeep in coming years will be yet another expensive act that will in turn requiring issuing even more debt.

This is a "tiny" little ponzi scheme in the grand litany of lies and scams promulgated by County Commissions and "local authorities" of all sorts, from these feifdoms to school boards, all over the land, backed up by bond issuers at banks who "help float" debt that mathematically cannot be retired on or before additional capital expense in maintenance and repair becomes necessary.

The banks, for their part, don't give a damn provided they get their fee. The accuracy of their projections for sustainability and paydown of the debt issued, just like everyone else's, are never coupled to accountability.

Indeed I'm willing to bet that under any reasonable estimate of actual historical use and toll collection, less operating expense (salaries of the toll collectors, routine maintenance and inspections, etc) the bond issues can never be retired when the imputed operating costs, including resurfacing and other work on the expected intervals, is taken into account.

Those in the "authority" and County Commission who think that traffic will rise to meet the required revenue are flat out of their minds.

The fact of the matter is that ramping toll costs over the last years have already prompted WalMart and Publix to build stores on this side of the bridge. WalMart is open now and Publix will be soon; the earth-moving equipment is in daily operation on that project right now.

That has and will continue to reduce, dramatically so, the "need" for local residents to cross said bridge and thus reduce the number of trips -- and the tolls collected.

The market has and will continue to spit in the face of the Okaloosa County Commission and MidBay Bridge Authority, reducing their pipe dreams of "efficiency in transportation" (not to mention their delusions of grandeur) to ash.

The market, of course, has a long history of doing exactly this quite efficiently; as price rises the utility value ex-cost to the local residents decreases. That increased net cost in turn causes businesses to find a reason to make it easier, faster and cheaper for residents to avoid paying said price.

Oh sure, the theory goes, the county can******the tourists, right after they spend $5 million in advertising to herd them in on their vacation so they can get bent over the fish-cleaning table while their wallet is vacuumed out. And let's not kid ourselves -- for those tourists who don't have a SunPass (that would be nearly all of them) when they get surprised by the all-automatic plaza on the extension and are forced to pay $11.50 (which will show up in the mail when they get home) that is likely to have a rather serious impact on their view of this area -- and not in a good way either.

But heh, the MidBay Bridge Authority will cackle at their playing of the proverbial troll.

The question is whether said tourists will come back to be screwed again, and if not, what happens to those precious "bonds" and their demanded coupon.

PS: The rolling of that debt, historically thus far, has been made possible only due to the secular decline in interest rates over the last 30 years. That secular decline is now over which means that all such projects that cannot retire their debt from operating revenue before it comes due are inevitably going to blow up in the coming years and decades. This is a mathematical certainty Mr. Vest.